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Who Owns Our National Debt?

Numbers speak louder than fears.

Former Sen. Alan Simpson has arguably done more to address our fiscal problems than anyone else in the last three years. He was co-chairman of the president's deficit-reduction committee, commonly known as the Simpson-Bowles budget plan. He's a good man on a good mission.

But he doesn't always get it right. Here's Simpson last week on The Daily Show with Jon Stewart talking about the fiscal cliff:

There's a group out there that doesn't give a damn about Republicans or Democrats or the president, and it's the people we owe $16 trillion to. Half of that is owned by private people -- people in New York or Cody, Wyoming. The other half is owned by feds, and half of that is owned by China.

Time out. I like you, Alan, but let's get the facts right.

China doesn't own a quarter of our debt. It doesn't even own 10%. When the latest data comes out, it probably won't even be the largest foreign creditor. (That title will go to Japan.) China has actually been a net seller of Treasuries for almost two years.

Let's start at the top. Who owns our $16 trillion national debt? Here's the tally as of June 2012 (the most recent month for which data is available):

And here's the breakdown of the 10 largest foreign holders as of September:

Yes, China is the largest foreign holder -- though its share is nowhere near one-quarter of the total. But Japan owns an almost identical amount of Treasuries, and its share is growing like a weed. Why all the fuss about China when no one seems bothered by Japan? And China, as mentioned, has been a net seller of Treasuries since 2011. In May 2011, China held $1.31 trillion in Treasuries -- $200 billion more than it owns today. This shouldn't be surprising, as the country is trying to let its currency slowly appreciate against the dollar. Many have asked in panicked tones what will happen to interest rates when China stops buying our debt. The answer: It already has. And not only has the world gone on, but interest rates are at all-time lows.

Some will counter that the only reason interest rates are low is that the Federal Reserve is buying all the new debt -- right? Sort of, but there are misconceptions here, too. The Fed has purchased a lot of Treasuries over the last few years, but that was after it slashed its holdings in late 2008 to make room on its balance sheet for emergency programs to stabilize the financial system. Since 2002, the Fed's holdings of Treasuries have increased by $1 trillion, or 10.8% of the new debt issued during that time. The blog Macro Market Musings has shown that the Fed's ownership share of Treasuries has actually declined in the last decade. (Where the Fed has grown its ownership share considerably is the market for mortgage-backed securities.)

So who has purchased the $9.3 trillion in new debt issued over the last decade? Pulling from several different sources, here's what I came up with:

None of this should be taken as an attempt to belittle those nervous about the debt. It's a serious issue no one should take lightly. The fact that we rely on foreign investors to finance 44% of our annual deficit is, to put it lightly, not ideal. The kindness of strangers doesn't last forever.

But what's more dangerous than a massive mountain of national debt? Exaggerations and misconceptions about that debt.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.